Thursday 15 July 2021 4:25 pm

Mounting inflation could trigger early end to BoE's bond buying

An external member of the Bank of England’s monetary policy committee has warned that surging inflation could prompt the central bank to end its bond buying programme early.

Michael Saunders said in a speech on Thursday: “if activity and inflation indicators remain in line with recent trends… options might include curtailing the current asset purchase program.”

The comments come after the ONS’ latest Consumer Price Index rose at its fastest annual rate in three years in June, according to figures published on Wednesday.

Read more: UK banks expect a rush of defaults in coming months

“For me, the question of whether to curtail our current asset purchase program early will be under consideration at our forthcoming meetings” Saunders added.

The comments come after the the Old Lady’s deputy governor, Sir Dave Ramsden, warned that inflation could reach at least four per cent.

Ramsden’s predictions were echoed by departing chief economist, Andy Haldane, last month, who also expects inflation to hit at least four per cent.

The Bank of England has doubled down on pushing ahead with its bond buying programme and ultra-loose monetary policy stance, citing ample spare capacity in the economy putting downward pressure on prices as justification. It has also said that recent inflationary surges are transitory, a similar position adopted by the US Federal Reserve.

Ed Monk, associate director personal investing at Fidelity International, said: “It’s clear that the Bank’s willingness to look through current rising inflation was based on a belief that slack in the labour market would keep wages lower, preventing a broad-based rise in demand, but there are signs that new hires are joining on higher salaries, with fewer workers relying on furlough than was expected at this stage.”

Read more: Haldane: Inflation will reach four per cent this year

Saunders warned that cost pressures globally could remain persistent and may cause inflation to stay above the Bank’s two per cent target for “2-3 years”.

“These price pressures may well have some persistent effects on UK CPI inflation, partly because of lags in the pass through to consumer prices but also because the underlying strength in demand.”

The comments raise the prospect of another member of the monetary policy committee voting against the Bank’s bond buying programme at its next meeting. Haldane was the only member of the MPC to vote against the programme at the last meeting.

Read more: UK inflation hits 2.5 per cent in June